Japan Continues to See Sustained Growth

By George Leong, B.Comm. Published : March 20, 2006

Japan may be finally getting out of its abyss and seeing sustained growth in its economy. The strong upward trend of the benchmark Nikkei 225 is positive. The barometer of large-cap performance in Japan continues to hold near its 52-week high and is up a healthy 51.52% from its 52-week low. Compare this to the gains we have been seeing in U.S. markets. As I have discussed in previous articles, investing in foreign markets is important and helps to diversify your portfolio. It also helps to reduce the currency risk of holding just U.S. assets.

The resurgence in the Nikkei 225 is a clear indication that Japan’s anemic economy (as far as growth) is on the comeback. Japan grew at 5.50% clip in the Q4. Don’t forget Japan still has one of the largest economies in the world with an estimated 2005 GDP at $3.87 trillion, trailing only that of the United States, the European Union and China. Japan may no longer be the superpower in Asia, but it still is a significant area for investment and growth.

Last Thursday, the Bank of Japan axed its super-easy monetary policy that had been in place for five years, another indication that the economy is on the mends. The central bank said it would begin to steadily increase interest rates to reduce the excess cash in the economy.

But don’t expect the kind of steady increases we have seen in the United States with the Federal Reserve. The Bank of Japan suggested the move to a tighter monetary system would be slow. Benchmark interest rates are expected to stay near zero during an adjustment period, waiting to see if the economy continues to develop. The central bank clearly does not want to choke off any economic momentum in the system.

The decision to not increase rates immediately is also a good sign for U.S. assets. Currently, Japanese investors are borrowing at very low rates and investing in higher-yielding U.S. assets. But the fear is higher Japanese rates could impact investment in U.S. assets; thereby, lessening the demand for U.S. assets and this could see prices decline. The aftermath could be a rise in U.S. interest rates to try to attract investment in U.S. Assets.